Feast or Fluke? US Home Sales Hit Highest in Almost Four Years

The real estate market was a feast for buyers in August, according to Commerce Department data released Wednesday. New home sales rose a dramatic and unexpected 20.5% to a seasonally adjusted annualized rate of 800,000 units, the highest since January 2022 and leaving virtually every estimate in the dust.

But, before anyone starts licking their lips, Wells Fargo analysts cautioned: “Take the gain with a huge grain of salt.” Economists noted that, without a sustained trend, the boom may simply be the outcome of weary homebuilders countering an oversupply with discounts and incentives for buyers.

No Home Run

The roaring August demand did indeed put a serious dent in the glut of new homes on the market, with inventory falling to 490,000 units last month, the lowest this year. Why isn’t that good news for homebuilders, who, according to NAHB/Wells Fargo surveys, have been fretting about the market’s prospects? Because according to the most recent survey, many of those homebuilders are resorting to steep discounts to move properties. Some 39% reported cutting prices in September, up from 37% in August, marking the highest sustained level of discounts to lure buyers since the Covid pandemic.

New homes only represent about 14% of US home sales, and month-to-month data can be volatile and subject to revision, so it’s too soon to declare the frozen housing market thawed. “It takes three months to establish a trend for new houses sold, so it’s too early to forecast a meaningful contribution this quarter from residential investment in the GDP equation,” said LPL Financial Chief Economist Jeffrey Roach. The macroeconomic tea leaves also point in multiple directions. On the one hand, the 30-year mortgage rate, which has been edging down since July, fell to an 11-month low of 6.26% last week, according to Freddie Mac. That’s great news for buyers. On the other hand, the labor market has softened, and housing prices remain stubbornly high:

• “Mortgage financing costs remain elevated, but time has started to break the gridlock, and inventories are starting to stabilize,” said Eric Teal, Comerica Wealth Management’s chief investment officer. “However, going forward, we believe a significant decline in long rates is needed to further stimulate demand.”    
• “As rates could decrease in the coming months, investors should see the residential market bottom out and become less of a drag on overall economic growth,” added LPL’s Roach. “If housing recovers, the economy will more likely skirt a recession, and if that’s the case, risk assets historically perform well in a non-recessionary rate-cutting cycle.”

Demographic Cliff: Earlier this week, Realtor.com reported that rising US family home prices appear to be a factor in falling fertility rates, which have dropped below the level needed to sustain the country’s population. What will that mean for the housing market?